AIG catastrophe, coming next week

[SOS]

In today's NYT, Joe Nocera details the staggering economic disaster known as the American International Group.
Next week, AIG will report the largest quarterly loss in American history.
This article is rich in detail and well worth reading.
AIG's London office ran an unregulated ratings arbitrage scam that will cost the US taxpayer hundreds of billions of dollars.
How was the biggest swindle in history perpetrated? Nocera provides the details:

February 28, 2009

Propping Up a House of Cards (edit)

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions.

We should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin. “They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert.

When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”

http://www.nytimes.com/2009/02/28/business/28nocera.html

[joeybee12]

1. My auto insurance payment is due next week...

...sounds like I shouldn't pay, because maybe the coverage won't be there.

[Sherman A1]

3. Mine is due in May

perhaps time for both of us to start looking around.

[Celebration]

8. I think there is a difference between the insurance unit

And the holding company.

Pretty sure your insurance is safe there. But, I'm not an authority.

[SOS]

11. The insurance is still functional

"To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage"

[Marrah_G]

20. Yes the insurance side is still profitable and functional.

[barb162]

29. There is a difference; they're all separate corporations.

The problems are in the holding company.

[barb162]

28. Pay it, they'll still be in business.

And the last thing you need is no auto insurance. Or please find another carrier ASAP.

[ProgrezivIndie]

39. i had aigdirect auto insurance until a few weeks ago

Over my many years of being required (by my state) to have my automobiles insured, I've had many companies to provide same. Driving records in my household are excellent (no tickets, no accidents, for decades)... so my premiums are about as good as they can be. In recent years, I was with "GE Auto Ins" (great low annual premiums). A few years back AIG bought out GE's auto insurance... and I've been with AIGdirect since then (even though I was unhappy about them issuing ONLY "semi-annual" policies).

Then, along comes this financial fiasco... and disclosures about the crookedness of top executives... and with my policy renewal coming due near the end of this month (March), I decided last month (early February) it was time to go elsewhere. So, I went for some "online quotes" (knowing full well that AIGdirect had changed their name to be 21st Century (https://home.aigdirect.com/AIGDirectWeb) -- as they try to SELL OFF their "auto insurance" holdings).

Well, I got several quotes (via online websites)... and 21st Century was among those. But to my surprise, and amusement, their quote was significantly HIGHER than was the renewal price on the paperwork I have sitting before me... and IN THIS AGE OF COMPUTERS... wouldn't they have to know (by my NAME, location, etc. on their "quote")... that I am already one of their customers?! }(

Anyway--to make a longer story shorter--I have already switched to Liberty Mutual (who happens to issue ANNUAL policies, with good coverage, at good rates). Once I had made the switch (in early February), and had my new "proof of insurance" in hand... I called AIGdirect to CANCEL. The customer service rep asked why I was canceling (and not renewing), about 8 weeks PRIOR to my (then current) policy expiration. I asked if they REALLY wanted to know... told the rep. that they personally were not to blame... but, on the chance our conversation was actually being "recorded for quality & training purposes" ... here's why: (and proceeded to scold the executives for their actions).

fwiw

[Trekologer]

62. You might want to send them something in writing

I had auto insurance from First Trenton Indemnity Company (now Travelers of NJ) for nearly 10 years. After an incident the previous winter where they canceled my policy in error then reinstated it (but didn't tell the Motor Vehicle Commission), I decided I would get another insurance provider. So in July of last year, I called them and told them I wouldn't be renewing my policy. In December I get a notice from a collection agency saying I owe First Trenton about $300. Only the other day did I finally get it straightened out. It took countless phone calls, certified mail letters, faxes, and finally complaints to the NJ Banking and Insurance commission... all because they didn't actually cancel my policy when their phone rep said it was.

[ProgrezivIndie]

63. oh, i did that as well...

Thanks for you concern & helpfulness! And I'm sorry to hear about your tussle with "First Trenton". Your advice about GETTING IT DOWN, IN WRITING is well stated!

Having been asked, by the customer rep. with whom I spoke: "Do you already have insurance with another company"? ... to which I responded, "Yes indeed I do, as of today, and that's why I'm calling to cancel my AIGdirect policy!" ... the rep. then told me if I would send them a copy of my "proof of insurance" (with the other company), then they would credit a pro-rated refund to that effective date.

So I sent in the required documentation, along with a written request for cancellation and a refund (effective on said date). It was about two weeks later that I got a "change notification" to my policy's declarations page. It indicated the policy was CANCELED (on the date which I had originally called them). They've not yet sent a refund check, but I expect that to show up within a few days as well.

[inna]

2. rec #2, and thanks for posting this!! nt

[seemslikeadream]

4. massive losses

AIG and Mena

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=125&topic_id=92675&mesg_id=96295





http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=5122129

5122129, US-AIG may give up control of Asia unit: sources/Shares of AIG tumbled 25 percent
Posted by seemslikeadream on Tue Feb-24-09 12:08 PM

http://uk.reuters.com/article/marketMovers/idUKN2440645520090224



U.S. stock market report <.N> 1043 ET 23Feb2009-AIG may give up control of Asia unit: sources
American International Group (AIG.N) may be willing to give up control of its prized Asian division, said sources with direct knowledge of the matter on Tuesday. The unit is worth about $20 billion.

The move comes as the company faces massive losses and is seeking additional funds.

According to the sources, AIG may consider a bid for a majority stake in American International Assurance Company Ltd if buyers submit a compelling offer. Previously, the company had been determined to cap the stake sale at 49 percent.

Shares of AIG tumbled 25 percent to 40 cents on Tuesday.

[madrchsod]

5. liquidate aig

people still need the services they offer and other companies will be glad to have the increased business.

[truedelphi]

7. Sounds like such a sensible practical notion

That I am sure it won't fly. No money for bonuses of the folks at good ol AIG.

[alcibiades_mystery]

12. If you liquidate AIG, dozens of major banks across the world will be officially broke

I'm talking about no money coming out of the ATM's. Zero.

It's that bad. The whole system of Western capital will collapse overnight. Your money will be worthless whether or not you are connected to any of those banks. Food riots bad. No money for the police or armies bad. Complete collapse of society bad.

[sendero]

13. No matter how you do this..

... money will be printed to insure FDIC deposits. AIG and many big banks are broke, and eventually the taxpayers are going to foot the bill. There is a school of thought that says the sooner we just do it the cheaper it will be.I think I agree.

[inna]

17. sometimes - very rarely, although this might be one of these cases ....

... the only answer is the revolution.

[alcibiades_mystery]

18. I don't disagree with that at all

[Pachamama]

24. Where did all the money go????

:eyes: Seriously. Where did all these Billions and Billions in profits go. Not just from AIG, but from around all the various sectors that were buying and selling these things and profiting.

Where is the money? And why is it that the American taxpayer has to cover it, including so that the whole european banking system doesn't fail either? Why isn't the EU and European taxpayers paying into this pool to keep the system afloat? Just wondering. :shrug:

[alcibiades_mystery]

42. The "money" at AIG was theoretical

Read the article. They were leveraged to the hilt, and kept no reserves. There was no money. It was an entry on a balance sheet.

[leveymg]

47. It wasn't even money - it was options, credit default swaps, and other derivatives. AIG was a big

market-maker in the stuff. Now, they want us to make it real with our own tax payments going forward several decades.

Like Hell we will.

[Junkdrawer]

48. I don't think we can. As I understand it, there's $500 to $700 TRILLION in CDS...

What the administration is doing is trying to prevent all those Alt-A loans from going bad.

See:

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=5121095

[SOS]

51. Nocera is saying the notional value of AIG CDSs is $450 billion

Probably salvageable if they aren't lying.

Roubini is warning of sovereign default's in Europe which will roll back onto Wall Street.
Banks that are "too big to save":

''The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign,'' Roubini wrote. ''At some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system -- including deposit guarantees -- could come unglued.''

[Junkdrawer]

53. So, AIG holds less than 1/60 of the estimated CDS Market?

Market as of 2008

DTCC, which maintains a database holding around 90% of all credit derivative transactions, held $29.2 trillion of outstanding CDS trades as of 26 December 2008.

It is important to note that since default is a relatively rare occurrence (historically around 0.2% of investment grade companies will default in any one year), in most CDS contracts the only payments are the spread payments from buyer to seller. Thus, although the above figures for outstanding notionals sound very large, the net cashflows will generally only be a small fraction of this total.

There is no centralised exchange or clearing house for CDS transactions; they are all done over the counter (OTC). This has led to recent calls for the market to open up in terms of transparency and regulation. In November 2008, the Depository Trust and Clearing Corp, which runs a warehouse for CDS trade confirmations accounting for around 90% of the total market, announced that it will release market data on the outstanding notional of CDS trades on a weekly basis.

...


http://en.wikipedia.org/wiki/Credit_default_swap

My guess is that no one knows, and if they do know, they're not saying, because the hope is that defaults can be held down and thus the true scope of the danger can be buried in history.

[MadHound]

25. Oh god, it's back

TEOTWAWKI

This is the same nonsensical bullshit that was used to push through the first bailout and rescuing AIG in the first place. The world will come to an end, life will become extinct, we will all die if AIG goes under.

Frankly I think the real danger is continuing to prop up AIG, and thus bleeding America dry.

If a corporation is too big to fail, then it's too big to exist in the first place and should be done away with.

[alcibiades_mystery]

41. There's no doubt these giant companies have to be dismantled

The problem is that they have to be dismantled sensibly.

Luckily, we have an adult in charge who understands this, and not children who will pout and fuss and pretend the whole thing isn't real.

[MadHound]

43. Then if they need to be dismantled,

Why should we continue to pour money into them?

[alcibiades_mystery]

44. You have to hold them up until you can take them down sensibly

It's a bitter pill born of thirty years of free market stupidities.

Some people compare this mess to ripping off a band-aid. It's not like that. It's more like letting a crumbling building just stand there until it collapses, passersby be damned, or paying to clear the area, develop a plan, and take it down in a controlled way.

600,000 jobs in January - poof, up and vanished. It's real, MadHound. It isn't fake. It's not something that can be ignored, and allowed to go the way it goes (which is a Hooverite position, in any case). It's quite real. This is a crisis of capitalism itself (which is fine by me, but you have to take it down like an adult would).

[stillcool]

6. Sounds like plain old theft to me...

[tbyg52]

23. That's what it's sounded like to me from the beginning.

In whose pockets is all this money that's been pumped up?

I said once, here, that I'd give my IRA for Obama to be elected. It *is* a fair trade (my IRA wasn't very big *before* the house of cards fell down), but I'd still like my money back....

[Dreamer Tatum]

61. It's not theft

It's greed and hubris.

AIG's entire house of cards was built on a single, solitary assumption: that home prices would
continue to increase.

If home prices were still on the steady increase, none of this would be happening.

[roamer65]

9. Geithner and Bernanke will backstop all of it.

Mark my words.

AIG is 80% owned by the Federal Reserve System.

They will simply expand the FRB balance sheet as needed to deal with AIG.

60 billion is "chicken feed" to FRB.

[slipslidingaway]

10. K&R thanks n/t

[zagging]

14. This and other examples are the reason the stimulus will fail

You cannot prop up over $150 trillion in bad paper by printing $1 trillion and throwing it around. It's a pipe dream.

They're lying to us.

[Profprileasn]

19. Stimulus?

Oh our children will be paying off this so called credit card that we are racking up. Quite unfortunate.

[rockymountaindem]

22. Who'd you vote for?

[HCE SuiGeneris]

36. 'zactly

You'll get nothing more from this poster.

[zagging]

35. Estimates of the bad paper vary widely

As the article stated, the US is not responsible for it, but it's all tied together. A good chunk of the bad derivatives and CDSs were taken by offshore money. The OP article notes the domino effect.

As for the number, you're right that nobody knows how much is bad. From what I have gathered, there are about 700T in CDSs and derivatives worldwide, with somewhere between 50 and 200 of them bad. It's not exact.

[northernlights]

56. unlike the credit card debt that your hero, Bush, racked up

ignoring binLaden while destroying Iraq and our military, the recovery program is to create jobs doing something useful -- rebuild and modernize our neglected infrastructure.

Just a different way to tackle unemployment -- creating useful jobs as opposed to killing off "excess" people.

[barb162]

30. Where did you get 150 trillion.

The US is not repsonsible for all ofthe bad assets in the world. As far as I know, no one has a real grasp of how much crap is really out there.

[SOS]

60. Total derivatives = $500 trillion

"Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks."

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm

Of that figure:

Credit Default Swaps Now Total $283 Trillion

http://financialrx.blogspot.com/2006/09/credit-default-swaps-now-total-283.html

[northernlights]

57. the US isn't the only one with a stimulus package

Even China is propping up its economy right now.

And, yeah, where'd you come up with the $150trillion figure?

[DCBob]

15. Sounds like a break up of AIG is what is going to happen.

That may be the only way for it to survive.

[barb162]

31. That's the most likely scenario. Almost of the the insurance units

are very highly profitable and they can be sold off.

[burythehatchet]

16. My first employer, and once (30 years ago) a truly impressive company.

[Muttocracy]

27. was it just an insurance company back then, not all the other investment/mgmt stuff? nt

[barb162]

33. It was mostly all insurance related things back then

and they were a pioneer in many respects.

[burythehatchet]

37. That's right. Mostly commercial property and casualty. And the interesting thing

is that at the time they went out of their way to stay out of the public eye. No advertising, no sponsorships (except in the Far East). But looking back now I see some elements of the enterprise as being a harbinger of things to come.

[barb162]

32. I know them quite well too.

Greenburg has to be rolling his eyes.

[burythehatchet]

38. I don't know whether Hank directed this. I think he was trying to stop it and he

was ousted. In retrospect, the one thing that should have raised red flags was when Jeff went to run Marsh and Evan was at another company while Hank ran AIG.

[barb162]

58. I read an article in Forbes or Fortune a few months ago about this

and the old man was actually madder than hell about what was happening to AIG. Maybe the boys wanted to get away from dad's hand. I remember when Jeff G. went to Marsh. It's amazing to see the current stock price, just about worthless. :eyes:

[DemoTex]

21. Check the FAA Certificate of Registration in the cockpit of many US airliners ..

The owner of the aircraft will read: AIG. What shall the Repo Man do?

[barb162]

34. For airliners, there are pilots hired who take the planes to a field

somewhere in AZ as I recall. There are a few corporations besides AIG that also own and then lease a huge number of jets to the major airlines. These other corporations could take the planes off AIG's hands without anyone noticing the transfer in ownership.

[TrogL]

26. my BIL is shitting himself

He has a fortune invested in AIG.

[alcibiades_mystery]

45. At 42 cents a share

That has largely evaporated anyway.

[DemReadingDU]

40. Where are the protests?

People all over the world are protesting bailouts of their country to the banksters with their tax money. Their citizens stand up, let their government know that they don't like their taxes being used for this purpose.

Where are the protesters in America? Do most Americans understand we are getting poorer by the day with more and more bailouts to the banksters with our tax money?

Or maybe workers have been bullied into thinking that protesting is not a worthy cause?


2/26/09 The global financial and economic crisis has sparked many protests in parts of Europe. Here are some details:
http://www.reuters.com/article/newsOne/idUSLQ87702

[Junkdrawer]

46. Wait until the Alt-A's REALLY start defaulting later this year...

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=5121095

[truebrit71]

50. I HIGHLY recommend that everyone visit this thread and watch the Mr Mortgage Youtube...

...very enlightening...and very sobergin bearing in mind what is going on right now...

The more I read, the more I learn, the more I am convinced we are in for a serious shit-storm...

[SOS]

52. Alt-A's already just as big as subprime (and will grow as unemployment skyrockets)

Despite the right-wing/Wall Street PR machine blaming everything on subprime "losers" the reality is very different.
Check out this chart for a real accounting of the bank losses so far:

http://www.nytimes.com/imagepages/2009/02/12/business/20090213_INSOLVENT_graphic.html

[MilesColtrane]

55. Roubini's basing those charts on a 5% decline?

Last two quarters of 2007s GDP were -6.7%.

He needs to revise those.

[slipslidingaway]

49. ...n/t

[MilesColtrane]

54. Gramm-Leach strikes again.

Commercial banks and insurance companies shouldn't be in the investment banking business.

This is one of the broken things that was fixed after the Great Depression.

No one is talking about fixing it now.

[spanone]

59. when greed becomes criminal, people need to go to jail...they were gaming the system & lost

[Elidor]

64. All I want to know is...

When is someone going to prison for this shit?

[slipslidingaway]

65. n/t